Buyers find real-estate deals in bankruptcy court

Commentary: So-called 363 sales gain popularity

PrabhaNatarajan

NEW YORK (MarketWatch) -- Investors scouring for cheap real estate assets are starting to find opportunities in bankruptcy courts, where companies are selling assets they no longer can afford to keep.

After the worst recession since the Great Depression, many real estate companies and developers that sought bankruptcy protection are selling properties through 363 sales, so named to refer to the section of the bankruptcy code that deals with this procedure. Such sales, typically processed quickly, hand the properties free of liens to the new owners and provide a way for real-estate investors to buy distressed debt.

The wealthy get back in the investing game

(3:41)

High-net-worth investors are regaining their confidence in the
markets, according to Merrill Lynch's World Wealth Report. Financial
services consultant Mike Kostoff shares how advisers can benefit from
their clients' new urge to invest if they play their cards right.

In the last six months, many opportunity funds created to buy such troubled assets have been disappointed at the scarcity of properties listed in the market. The paucity results mainly from lenders not forcing owners into foreclosure, which in turn has helped maintain status quo in commercial real estate despite a 10% delinquency rate.

Following in the footsteps of such corporations as Chrysler LLC and Eddie Bauer Holdings Inc., more real-estate companies are using 363 sales to sell assets without calling it a liquidation. Transactions in various stages of completion include assets owned by mall owner General Growth Properties Inc., hotel chain Extended Stay, residential developer Levitt & Sons and the Georgetown Park Mall in Washington D.C.

Though no tallies exist yet, anecdotal evidence suggests 363 sales are gaining popularity as another way to resolve a nonperforming loan backed by commercial real estate.

"The 363 sale is one of the remedies available to creditors as the industry rebounds," said John Kavill, a managing director at Jones Lang LaSalle Inc. (JLL) in Washington. "We've seen a few sales and expect to see an increase in numbers this year" as issues surrounding nonperforming real estate assets are resolved, he said.

In the 363 process, which Kavill considers "more-efficient sales execution," a buyer gets the property free of all prior encumbrances and claims -- a big deal for an asset with as troubled a history as Georgetown Park.

The mall's owners, Western Development, defaulted on a note with $68 million in current balance and face possible foreclosure. Lender Capmark, itself in bankruptcy, is trying to sell its position on the loan.

The partners in the mall's development have been in the middle of a legal battle for years, with one claiming the other took ownership of the property illegally. As a result, tenants have hesitated to sign leases, and few lenders stepped in to help when the current owner defaulted on the loan.

A new buyer, to be announced when the auction concludes Tuesday, will take over Capmark's position.

However, attorneys suggest that investors bid with caution and conduct extensive due diligence before bidding on such assets. They caution that bankruptcy estates may not have sufficient funds to pay for future relief, so buyers are advised to make sure terms of the deal clearly spell out that sale proceeds be used toward paying off delinquent loans and any lingering liens.

As these sales gain popularity, investors are expected to get more comfortable with their structure.

Earlier this month, Levitt & Sons sold a portfolio of five residential developments, in varying stages of completion, to bidders at $37.3 million. The developer is in Chapter 11 bankruptcy and sold the assets as part of its reorganization.

Prabha Natarajan covers mortgages and mortgage bonds, both commercial and residential, for Dow Jones Newswires. This column originally appeared on Dow Jones Newswires.

Mortgage Rates

Powered by

This advertisement is provided by Bankrate, which compiles rate data from more than 4,800 financial institutions. Bankrate is paid by financial institutions whenever users click on display advertisements or on rate table listings enhanced with features like logos, navigation links, and toll free numbers. Dow Jones receives a share of these revenues when users click on a paid placement.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.